Epstein, Tort, and Sticking it to BP

Richard Epstein mounts a defense of tort liability in today’s WSJ. I wish that a defense of civil liability was a stronger element of free-market politics in this country, so I’m happy to see Epstein make the case for tort in a place such as the WSJ. Epstein calls for “a no-nonsense liability system that fastens full responsibility on the parties who run dangerous operations, no excuses allowed.” I am not a tort aficionado, but I wonder whether drilling for oil counts as an ultrahazardous activity exempt from the ordinary regime of negligence liability or if this is simply Epstein advancing his preference for a regime of strict liability. He goes on to write:

A tough liability system does more than provide compensation for serious harms after the fact. It also sorts out the wheat from the chaff—so that in this case companies with weak safety profiles don’t get within a mile of an oil derrick. Solid insurance underwriting is likely to do a better job in pricing risk than any program of direct government oversight.

I agree with Epstein that insurance companies coping with the risk of a tough liability regime are likely to be much better monitors than government agencies coping with the risk of political embarrassment. I do think, however, that Epstein’s article is rather too optimistic that tort can so easily serve the multiple purposes that he assigns to it. By providing victims with what amounts to a form of insurance through the tort system we create another kind of moral hazard, one that is less easy to manage through the kind of monitoring that private insurance provides because the relationship between insured and insurer in the tort regime isn’t contractual. Furthermore, as a system of compensation tort law has a tendency toward feast and famine for victims. This may mitigate concerns about moral hazard, but if we are interested in compensation for victims (as opposed to plaintiff’s lawyers) this is a problem.

There is an important aspect of tort liability that doesn’t make an appearance in Epstein’s argument. Liability does more than provide compensation and internalize costs, laudable as those goals are. As Benjamin Zipursky and John Goldberg have argued it also gives those who have been harmed a way of acting against those that have harmed them. Tort lets those who have been hurt by BP strike back, asserting themselves are more than passive objects of harm or compensation. If the proponents of civil recourse theory are to be believed — and I find myself more than a little persuaded — this is a goal worthy of attention in its own right.

Put more simply, one of the reasons we want tort law is so that those who it has hurt can stick it to BP for the harm they have suffered.

Put more simply, one of the reasons we want tort law is so that those who it has hurt can stick it to BP for the harm they have suffered.

I wonder if tort liability can do this very well in cases like this, where the harm is dispersed so widely. Suppose I had been planing on going to the beach in Pensacola Florida for a while, and maybe even booked a room or paid a deposit, but now my plan is ruined because of oil on the beach. Tort liability won’t really help me, because my loss is either intangible or else is such that, by the time I could bring a case, even if I could win I’d not be “made whole”- the time, expense, etc., even factoring out the uncertainty, wouldn’t be made up by any award I might get. Now multiply this by lots and lots of people hurt in somewhat similar ways, and we have all sorts of injury going uncompensated and harm going unpunished. (Class action might work for some of this, but not for lots, I think.) I am, in general, a fan of tort liability, but it has, I think, very real limits, and seems unlikely to do all that’s necessary in cases like this.

I would add one more caveat re insurance-pricing-risks, which is suggested by Thaler’s NYT article:

“A policy with some appeal might make drilling rights include a mandatory insurance policy with a big deductible, say $100 million, and a cap somewhere in the billions. In an ideal world, this would influence insurance companies to monitor risks closely. (But the recent experience with the American International Group reminds us that we do not live in an ideal world.)”

While the feast or famine risk of tort recovery is a very important problem that begs for a more reliable payment scheme in a case like this, another risk might be the role of judges in deciding if public policy is best served by crafting some degree of judicial protection for off-shore drilling. Historically, judges have, on occasion, taken a fairly robust stance that big business, and progress of a financial sort, is good for this country, and that some risk of even horrible harm has to be tolerated. See, for example, Indiana Harbor Belt Railroad Co. v. American Cyanamid Co., where Posner protected chemical companies from strict liability when shipping dangerous chemicals by train through crowded metropolitan areas.